Whilst much of today’s media space devoted to last night’s ‘debate’ was consumed by certain outlets finding some political spine after a little pseudo-invertebrate was uprooted, there was one announcement that’s worth a closer look. If you’ve been following the debates about how best to price carbon, Howard’s claim in the debate last night to auction permits might have sounded like he was making good on the rhetoric of ‘not picking winners.’ The whole point of a market is to allocate property licenses to dump carbon with the greatest efficiency. The American experience, moreso than the Australian one, with auctioning spectrum in the mid 1990s was hailed as a success in these terms. Then Vice President Al Gore claiming at the time ‘now we are using the auctions to put the licences in the hands of those who value them the most.’1 And with US$23bn in permits raised between 1994 and 1997, companies recruited the best rational choice economists they could to shape the market, as Francesco Guala has documented in great detail.
Many of the well publicized problems with the EU Emissions Trading Scheme stem from a refusal to leave market mechanics to decide allocation and allow special pleading from big polluters. Germany, for example, attempted to second guess the outcomes of the market by widely allocating free permits with disastrous results. The net effect of the first round of the scheme has been to transfer many billions of Euro from coffers to power companies in the form of windfall profits. In effect, it was a major tax.
On the one hand Howard signalled an awareness of this problem last night :
The reason [the revenue from carbon pricing] will be substantial is that in the initial stages of the operation of the emissions trading system there will be a lot of free permits issued to take account what I might say are predetermined entitlements.Mr Howard said many of the free pollution permits would be “exhausted in a one-off exercise”.
“You then auction permits and it’s a matter of common sense that you will increase the proportion of permit allocations through auction, as time goes by, therefore the amount of money to be raised will rise.” (my emphasis)
Considering (Rudd and) Howard’s commitment to preserve the ‘natural advantage’ of having an abundance of coal there are some assumptions in official modelling that mean we can decode what those ‘predetermined entitlements’ will actually mean for the few businesses directly effected by carbon pricing (ie. the insular domestic stationery energy market dominated by coal-fired power and ‘export exposed’ energy-intensive industries like steel and aluminum). After all, investment decisions are driven by expectations of future price. Official modelling (scenario 2 in the picture) suggests that when the carbon capture pony comes online in 2020, coal will be back in the game.
The bottom line is that auctioning permits is important when considering how stationary energy will be effected by carbon pricing, but what’s more important is the underlying policy intent. As the saying goes, the devil really is in the detail and committing to a ‘carbon trading scheme’ isn’t really a commitment at all until we know who gets/is the free lunch. The real question is whether we’re willing to delay the inevitable and keep somnabulist industries wandering, redundant, through the coming decades. If so, what happens if CCS installations do a Bhopal/Challenger/Chernobyl and who pays?
- However, as Henry Farrell points out at CT with regard to the recent Nobel Prize for Economics, there are endemic problems with claims like these.[back]
Doing something by doing nothing is the Liberal strategy on climate change. The free kick that they’ll be giving major polluters is completely inexcusable in the face of increased climate change. Coal power companies should be paying through the nose for their emissions.
We need real a real carbon pricing system to push the cost of coal above renewables from the get-go. Only then can we claim to have a decent system because it will actively provide an incentive for building renewable energy infrastructure as well as capturing the forces of the market.
No more free kicks, no more acquiescence to the coal industry, no more coal fired power stations.
The quickest impact of a decent emissions scheme will be co-firing coal plants with natural gas and agricultural waste. At the same time we’ll see more wind farms going up (provided the dastardly parrots don’t rear their heads again) and more work done on manufacturing solar panels within Australia.
The end result will be a few power companies able to maintain a handful of coal plants (budgeting in the carbon costs) while the bulk of our electricity will come from distributed, de-centralised networks running a combination of solar and wind and using the excess electricity to generate hydrogen.
A man can dream.
It just seems so much simpler to have a flat carbon tax. I think there are two main benefits to a tax, the first is that we can avoid the complexities and pitfalls of a trading system. The second advantage is that it could be raised over time, say $1 per tonne in 2008 increasing a $1 a year for the next 50 years, this way individuals and companies can easily adapt to any new regime.
Sam, best guess, hydrogen won’t be our energy storage medium for stationary energy any time soon.
The round-trip efficiency of electricity -> electrolysis -> fuel cell (or gas turbine, which is almost as efficient on an industrial scale) -> electricity is shockingly bad.
I’m going to do a post on dispatchable wind power soon.
Oh, certainly it won’t be viable for a while but it at least gives us a storage system which doesn’t rely on a chemical reaction involving heavy metals such as the various battery technologies. The “Hydrogen Economy” may not be with us for quite some time but it’s a possibility as a short term, localised storage system.
I think the point with a Hydrogen economy (once storage issues are figured out) is to make hydrogen independently of electrolysis if possible (Such as using excess heat from nuclear reactors to drive chemical reactions that give hydrogen or using bacteria to secrete it).
There is a whole host of reasons why it is much better to auction permits than hand them out for free. The ‘polluter pays’ principle is based on the premise that the right to a clean environment is owned by the public. Therefore, if a firm wants to pollute, it should purchase the right to do so from the public. Handing out free permits is also extremely regressive, and effectively represents a transfer of wealth to shareholders, who tend to be wealthier than the general population. When permits are auctioned, the revenue raised can be used for social or environmental purposes, or to offset distortionary taxes. Quite a bit of modelling also suggests that any reduction in GDP from a carbon price is lower if permits are auctioned rather than handed out for free. In other words auction is better value for money. Free permits are therefore not ‘least cost’.
An emissions trading scheme which only had permits auctioned would be much simpler to implement than one where there are free permits, and therefore could be introduced much earlier.
The way that the government is proposing to allocate permits (as stated in the Task Group Report) is that some will be handed out for free to ‘trade exposed energy intensive industries’; and some will be handed out for free to provide an “up-front, once-and-for-all, free allocation of permits as compensation to existing businesses identified as likely to suffer a disproportionate loss of value due to the introduction of a carbon price” - most probably electricity generators which use coal fired power stations, the dirtier the power station, the more compensation they would be eligible for. The rest of the permits will be auctioned. This method of allocating permits is almost exactly the same as proposed by the Australian Industry Greenhouse Network, also known as the ‘greenhouse mafia’.
The Task Group Report had suggested that the money raised from auctioning some of the permits should be spent on research and development (but not deployment) of low emissions technologies. What has changed with Howard’s announcement is that some of the funds will be used to alleviate the impact of a carbon price signal on low income households. This would make a scheme less regressive but money could also be spent on activities like energy efficiency and reducing emissions from land use change. If less free permits were handed out to big polluters, there would be more funds available for these activities.
I’m convinced that the whole concept of permits is deeply flawed. Unlike a (fairly steep) carbon tax, the permits will be just another way for a bunch of spivs to get rich from the public purse. It’s also unlikely that they’ll make much difference to emissions.
This just in:
No not the work of my cat on teh puter; from the Department of Prime Minister and Cabinet early abatement incentives presentation
My favourite is the pointless unit of measurement on the y axis.
Who do you trust to run the economy?